Trading with Flag and Pennant Chart Patterns Binary Options 2020

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Chart Patterns For Trading Analysis

Chart patterns are an essential part of technical analysis in binary options trading, but there are some patterns that are especially useful to the trader who wishes to maximise their success. Here is an outline of some of the best known and most effective chart patterns that you may observe on your technical charts and which can inform your executed trades.

The Cup and Handle

This popular pattern is a continuation pattern which suggests that the current market trend will continue. The special characteristic of this pattern is that it serves as a prediction that there will be a pause in the increase of the asset’s price, or possibly a short decrease. The upward trend will be followed by a short decrease before a new increase will form. This reveals the cup part of the pattern. The handle is then formed by a small movement of similar directions and then the price will shoot much higher. This is an easy pattern to identify and can be observed on longer term time frames from a couple of months up to longer than a year.

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Double Tops and Bottoms

Double tops and bottoms are one of the more reliable reversal patterns that you are likely to observe on your charts and indicates a trend which is about to reverse. This pattern will form following a stable trend, being formed when the movement of the asset’s price tests the resistance or support levels but fails to break through them. This is a dependable pattern and is often a sign of a mid to long term reversal in a trend.
In the case of a double top, the price will attempt to break through the resistance twice unsuccessfully. Following this second attempt, the price will take a dive, starting a new downtrend. A double bottom is the complete opposite to the top pattern, being preceded by a downtrend which will bounce up twice once it reaches the support level and then start on an obvious ascend, signalling a fresh uptrend.

Triangles

There are 3 different varieties of triangle pattern to be seen on technical charts – descending, ascending and symmetrical. Each of the three types has different properties and signifies something different, however they all have their time frame in common which will general range from a couple of weeks up to a couple of months.
The symmetrical triangle is probably the easiest to understand. Being preceded by trend lines which approach each other slowly until there is a breakout in either a downward or upward direction, the symmetrical triangle is a sign of a stable trend in whichever direction the breakout heads, with resistance and support serving as the triangle’s sides.
The ascending triangle shows flat resistance with ascending support. Usually, there will be an upside breakout which confirms the trend.
The descending triangle forms the opposite of an ascending triangle, with flat support and descending resistance. The breakout will occur to the downside, confirming the new downtrend.
Triangles are very reliable patterns, virtually always confirming emerging trends. They are easy to spot and use to predict the short term momentum of the market.

Flag and Pennant

The flag and pennant continuation pattern forms because of sudden movement in prices followed with a stable period and then another price movement to the same direction as the initial one, indicating a trend emerging. A flag and pennant pattern will be very short term, usually lasting less than 3 weeks. The pennant looks very similar to the symmetrical triangle, however it is shorter term, with its diverging trend lines going towards each other before the price moves upwards. The flag pattern features parallel rather than diverging lines, but this pattern still produces the same end result.

Wedge

A wedge pattern can be either a reversal or a continuation pattern and is quite similar in nature to the symmetrical triangle. There are, however a couple of differences, the first being that the wedge pattern follows a downward or upward direction, while a symmetrical triangle goes sideways. Secondly, the wedge appears on longer term charts, usually between 3 to 6 months.
Gaps
The gap occurs in the event of a significant happening in an asset’s field. It is possible to spot a gap on either a candlestick or bar chart, but not on a line chart or point and figure chart. A gap shows a huge difference between prices across 2 consecutive periods of trading. It may be either a large dip or jump in asset prices. There are 3 varieties of gaps, with breakaway gaps forming at the start of a trend, runaway gaps forming in their middle and exhaustion gaps which appear at the trend’s end. All three are relatively easy to spot and can help a trader to place successful options.

Trading Pennant Chart Patterns

In currencies you can find pennant-like structures at any time frame down to the minute charts. And the development is often the same as the larger patterns – only on a shorter time horizon.

Recognizing pennants and trading them is easier than triangle patterns because they are fairly distinctive. If you’re in doubt you can use our pennant and flag indicator to help find them on the charts you’re trading.

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Basic Property of Pennants

Pennants are triangular-like patterns that stand on a “pole”. This is part of the shape is referred to as the “flagpole” or the “mast” and this prominent feature is what gives these patterns their name.

Flags are a closely related chart pattern. The main difference between a flag and a pennant is that the flag’s body is rectangular in shape.

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Feature Pennant Flag Triangle Wedge
Orientation Flat or nearly flat Rising or falling Flat or nearly flat Rising or falling
Flagpole Yes Yes No No

Market sentiment during a pennant formation can be understood as follows.

  1. Entry rally – flagpole formation during initial burst of momentum
  2. Consolidation – the body of the pennant forms as momentum slackens
  3. Exit rally – the continuation move after the pattern completes

To be a true pennant, in the first phase the market must make a strong move in one direction. In addition the flagpole should be reasonably straight. This indicates that the sentiment was strongly favoring one side.

In the second phase, the market enters a consolidating period. This is a pause and it’s where the price forms into the pennant’s body. The final phase occurs with a breakout. This happens at the tip or just after the tip of the pennant. The breakout will usually be in proportion to the flagpole size.

In a text book case, the exit breakout should equal or exceed the scale of the flagpole. This is the profit target.

As with all technical patterns, in real trading situations pennants come in a wide variety of forms. You’ll rarely see cases that look exactly like a text book.

The best approach is to look for general characteristics, rather than rare but precise formations.

How to Locate Pennants in Practice

One thing that makes pennant structures easy to find is the existence of the flagpole. This tells which way the market will probably go – at least in an ideal case. This fact makes the trading rule for pennants simple. All things equal, the market is likely to continue in the same direction. And so this is the direction to trade.

Bullish pennants are usually a reliable indication that a trend is set for a new upward leg. In other words they serve as good continuation signals. Pennants are useful in cases where you’ve missed the first wave of a trend but still want to capture some of the upward strength that’s remaining.

You can spot a bullish pennant signal as follows. First wait for an upward price wave. In Figure 2 this is marked between the dotted lines. This upward wave forms the bullish pennant’s flagpole. Next wait for the consolidation phase. In this phase, volatility reduces and the upward trend essentially flattens out into a tip.

During this phase the market will fluctuate without any clear direction. In doing so it traces out the triangular pattern of the pennant.

The pennant’s body can be angled slightly upwards from the horizontal. But more likely it will point downwards against the trend. If the body is aligned closely to the trend, it’s not a true pennant. It probably won’t produce a strong enough breakout to make the trade worthwhile.

Figure 2 shows an example playing out on the chart AUD/JPY H4. Here you can see the “tracer line” that forms the flagpole. During this phase there’s a strong burst of upward momentum. However this quickly exhausts and the market flattens with a sharp drop in volatility.

The pennant’s body is nearly horizontal.

The flagpole is about 850 pips in height. One thing to note here is that the market was excessively volatile as the “mast” formed.

For this reason, we wouldn’t set a stop loss down at -850. That would be below the start of the trend. In this case it’s better to use the moving average line as a guide. The preferred thing to do here would be to set a stop at about 300 to 400 pips below the entry level.

The profit target would be a similar size to this. Make sure the stops/profits are consistent with any support and resistance areas. The profit target should be under any upper resistance and ideally the stop should be below a support.

Trading Pennants on the Bearish Side

In most trends you’ll see the market moving in “fits and starts” rather than a straight descent. These step patterns often appear as bearish pennants.

Figure 3 shows EUR/USD H1 chart. This shows a text book example of a bearish pennant. Here you can see a clear and abrupt drop as the flagpole traces out. This is marked with the arrow.

The pennant body then forms as the market attempts a weak recovery. When this fails, bearish sentiment reasserts and pushes the market sharply lower. This pennant pattern forms over about 200 hours. That’s just over 8 days.

In this example, we would enter the market short (selling) after the pennant pattern is fully complete. Again, we use the flagpole and the pennant depth as a guide to stop loss and take profit areas.

Setting stop and profit levels

In this case the flagpole is about 250 pips in size. It wouldn’t be advisable here to use a stop distance much above 250 pips. Keep in mind that pennants are technical trades. There’s nothing to be gained in chasing the market upwards when trading a bearish breakout. Unless there’s some other reason to stay in the position.

Likewise, we would set the profit target around this size too. In summary then we would have a take profit below the entry level of the pennant at between 200 and 300 pips.

Once the market moves clearly below the pennant’s body, it’s a good idea to move the stop loss down to your entry point. That’s around the pennant’s point. This ensures you won’t be caught by any strong reversals.

How to Deal with Ambiguous Pennants

Not all pennants are as clear as the above examples. In real situations, they can be ambiguous and even contradictory. So how do we trade these cases, if at all?

The chart example in Figure 4 shows a strong falling trend on the USD/JPY H1 chart. To give some context, the small box on the top right shows a view of the entire trend.

Pennants such as those in Figure 4 are fairly typical in real forex charts. In the first case, there’s a strong downward move which halts abruptly.

The market then makes a weak but volatile recovery. This forms a pennant body.

Following on from the first we don’t see a clean continuation downwards after the bearish pennant ends. Rather there’s another stronger upward leg, before the market succumbs to downward selling pressure again. We then see a similar thing repeated in the second pennant.

These patterns could also be considered as “flags” depending on exactly how you interpret the price line.

These trades would still have been profitable when using the above rule as a guide for your stop losses. The snag though is there’s more drawdown than when the market makes a clean break in the expected direction.

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Pennant Chart Patterns: Identify Consolidation Periods During Market Trends

By NinjaTrader | February 27, 2020

Pennant chart patterns are trading indicators that can appear after big up or down market moves. This pattern can be viewed as a continuation of either a bullish or bearish trend. Pennant chart patterns serve as indicators for consolidation periods during market trends.

Similar to flag patterns, pennant patterns are technical indicators used to signal potential large market moves. The only difference between these two patterns are their shape:

  • Pennant Patterns – Shaped like a triangle
  • Flag Patterns – Shaped like a rectangle

Other than shape, pennant and flag patterns are identical day trading indicator signals of consolidation followed by a large bullish or bearish move.

How Do I Spot Bullish Pennant Chart Patterns?

Bullish pennant chart patterns form in the midst of a financial instrument’s uptrend. While a bullish pennant pattern is occurring, contrarian traders are attempting to sell into the rally or take profits from the initial leg up. After consolidating during a bull run, the trend will continue its upward momentum.

In the chart below, you can see:

  1. The formation of the initial bullish trend
  2. Followed by a consolidation period represented by a pennant pattern
  3. The continuation of the initial bullish trend

How Do I Spot Bearish Pennant Chart Patterns?

Bearish pennant chart patterns form in the midst of a financial instrument’s downtrend. While a bearish pennant pattern is occurring, contrarian traders are attempting to ‘buy the dip’ or secure profits from selling short the financial instrument. After consolidating during a bear run, the trend will continue its downward momentum.

In the chart below, you can see:

  1. The formation of the initial bearish trend
  2. Followed by a consolidation period represented by a pennant pattern
  3. The continuation of the initial bearish trend

Ready to get started practicing spotting bullish and bearish pennant patterns with NinjaTrader’s free trading simulator & live market data? Download Now and register for a free futures data trial to start exploring the markets!

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